The conventional method for calculating and managing interest on deposits and loans is dependent upon the maintenance of a state known commonly as the account balance. Credit and debit transactions are posted (added or subtracted) against the account in order to reflect change. Often, this activity must be maintained for a substantial period of time by the institution for historical and tax reporting purposes. The account balance represents the summation of all credits and debits and is thus dependent on all prior activity of an account to date. Periodically, interest is compounded into the account by crediting the account with an amount equal to the product of the account balance on a given date times a factor representing an established interest rate for a given period of time. Each day, month, quarter, and year-end, every account in an institution must be serviced in some way or another, if for no other reason than to accumulate the day's anticipated interest which has been earned but not yet credited. These processes are often time consuming and must be completed for all accounts in an institution before the institution can open for business the next day.
Because the account balance is at all times a summation of all prior debits and credits, including credited interest, and each computation of earned interest is carried out by multiplying the account balance by the applicable interest rate, any error in the account is propagated forward and correction of any error requires a re-calculation of all subsequent transactions.